Report No. 43004-CZ

CZECH REPUBLIC REPORT ON AN INTEGRATED REVENUE ADMINISTRATION VOLUME II: ASSESSMENT OF THE PLAN FOR INTEGRATING COLLECTION FUNCTIONS OF SOCIAL SECURITY AND HEALTH INSURANCE WITHIN A UNIFIED REVENUE ADMINISTRATION

June 2008 Poverty Reduction and Economic Management Unit Europe and Central Asia Region

Document of the World Bank

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CURRENCY AND EQUIVALENT UNITS (as of June 10, 2008)

Currency Unit = CZK (Czech Koruna) US$ = CZK 15.78 CZK = US$0.06

ABBREVIATIONS

CCA Czech Customs Administration CD Customs Directorate CIAT Inter-American Center of Tax Administrations CTA CZK CSSA

Czech Tax Administration Czech Koruna Czech Social Security Administration

DCG Directorate of Customs Guards EC European Commission ED Executive Director EU European Union FD Finance Directorate GDC General Directorate of Customs GDF General Directorate of Finance GFCD General Directorate of Customs and Finance GoCR ICT

Government of the Czech Republic Information and Communication Technology

IMF International Monetary Fund IT Information technology LTO Large Taxpayer Office MOF Ministry of Finance MOH Ministry of Health MOLSA Ministry of Labor and Social Affairs OECD PAYG

Organization for Economic Cooperation and Development Pay As You Go

PREM Poverty Reduction and Economic Management PSIR RSSA

Public Sector and Institutional Reform Regional Social Security Administration

SKAT Danish Tax and Customs Authority UK VZP

United Kingdom General Health Insurance Corporation

WB World Bank

Vice President : Shigeo Katsu Country Director : Orsalia Kalantzopoulos

Sector Director : Luca Barbone Sector Manager : Ronald E. Myers

Task Leader : Munawer Sultan Khwaja

ACKNOWLEDGEMENT

This Report was written as part of World Bank support to the Ministry of Finance of the Czech Republic. The support was managed by the Public Sector and Institutional Reform (PSIR) Cluster at the Poverty Reduction and Economic Management (PREM) Unit in the Europe and Central Asia Region of the World Bank. The Report’s main authors are: Munawer Khwaja, Jana Kunicova, Carlos Ferreira and Eimar Coleman.

This Report would not be possible without multiple in-depth discussions with Mr.

Peter Chrenko (Deputy Minister of Finance), Mr. Martin Jareš (Director of Tax and Customs Policy Department, Ministry of Finance), Mr. Zdenek Tesar (Financial Direcorate, MOF), Ms. Bozena Michalkova (CSSA), Ms. Lucie Bryndova (Ministry of Health), Mr. Pavel Hrobon (MOH) and Mr. Jiri Kral (Ministry of Labor and Social Affairs). The team is indebted to them for their invaluable insights, patience, and good humor.

In addition, the team is grateful to the following counterparts for their inputs,

time, and hospitality: Mr. Tomas Cervinka (General Health Insurance Company), Mr. Pavel Kolar and Mr. Vladimir Solc (CNZP), Ms. Aneta Wolfova (MOH), Ms. Ivana Jensovska (MOH), Mr. Jiri Kudlik (CSSA), Mr. Vladimir Kolar (CSSA), Ms. Vlasta Pertlova (CCSA), Ms. Jana Laumannova (CSSA), Mr. Vladislav Jonik (CSSA), Ms. Stepanka Filipova (CSSA), Mr. Karel Bauer (RSSA, Hradec Kralove), Mr. Vilem Kahoun (RSSA, Hradec Kralove), and Ms. Jindriska Jisova (Financial Directorate, Tax Office, Prague 5).

The key features of the Report were presented during a briefing session in the

Ministry of Finance in Prague on April 25, 2008. Comments were received during the discussions and these have been incorporated into this draft version wherever possible.

Further information on this support can be obtained by contacting Munawer

Khwaja, Senior Public Sector Specialist & Revenue Reforms Coordinator, PSIR, The World Bank at 202 458 5110 or mkhwaja@worldbank.org.

CONTENTS

1. INTRODUCTION............................................................................................................................... 1

A. BACKGROUND ................................................................................................................................... 1 B. THE STRUCTURE OF THE REPORT ...................................................................................................... 3

2. STRATEGIC OBJECTIVES OF INTEGRATING REVENUE FUNCTIONS ............................ 5

A. INTRODUCTION.................................................................................................................................. 5 B. STRATEGY FOR REDUCING COMPLIANCE BURDEN AND IMPROVING THE BUSINESS ENVIRONMENT . 6 C. STRATEGIC MEASURES FOR IMPROVING COLLECTION EFFECTIVENESS AND EFFICIENCY ................. 8

3. PRELIMINARY ASSESSMENT OF SOCIAL SECURITY, HEALTH INSURANCE AND TAX ADMINISTRATIONS ...................................................................................................................... 10

A. INTRODUCTION................................................................................................................................ 10 B. KEY FEATURES AND CHALLENGES OF THE SOCIAL SECURITY ADMINISTRATION............................ 11 C. KEY FEATURES AND CHALLENGES OF THE HEALTH INSURANCE SYSTEM ....................................... 15 D. KEY FEATURES AND CHALLENGES OF THE TAX ADMINISTRATION ................................................. 17

4. INTERNATIONAL EXPERIENCE IN INTEGRATION............................................................. 20

A. INTRODUCTION................................................................................................................................ 20 B. THE BULGARIAN EXPERIENCE......................................................................................................... 21

5. ASSESSMENT OF STAKEHOLDER SUPPORT FOR INTEGRATION.................................. 25

A. POLITICAL CONSENSUS AS A PRECONDITION FOR SUCCESS............................................................. 25 B. PRIVATE SECTOR............................................................................................................................. 25 C. ORGANIZED LABOR......................................................................................................................... 25 D. POLITICAL PARTIES ......................................................................................................................... 26 E. CONCLUSIONS ................................................................................................................................. 26

6. ROADMAP FOR INTEGRATION................................................................................................. 28

A. CONTEXT......................................................................................................................................... 28 B. KEY INITIAL STEPS.......................................................................................................................... 29 C. INSTITUTIONAL ............................................................................................................................... 30 D. ORGANIZATIONAL........................................................................................................................... 31 E. BUSINESS PROCESSES...................................................................................................................... 33 F. INFORMATION AND COMMUNICATIONS TECHNOLOGY .................................................................... 34 G. TIMELINE AND SEQUENCING ........................................................................................................... 35

7. RISKS AND CHALLENGES........................................................................................................... 37

ANNEXES ................................................................................................................................................... 40

REFERENCES............................................................................................................................................ 42

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INTRODUCTION1

This report is a result of the World Bank mission to the Czech Republic during April 21-25, 2008. The Government of the Czech Republic requested that the World Bank team evaluate a potential integration of the revenue functions of the social security and health insurance within the tax administration.

This visit was preceded by a World Bank mission in February 2008 that offered an evaluation of the proposed merger of the Czech Tax and Customs Administrations. This report is building on the findings of the February 2008 mission by consistently expanding recommendations to the eventual integration of all revenue functions into a single revenue agency.

This report presents our preliminary assessment and recommendations. In the view of the Bank, the proposed integration should not be a stand-alone exercise, but rather, its design and implementation should be carefully crafted to complement a larger package of reforms of the revenue administration.

1. BACKGROUND

A key issue for the sustainability and health of social security systems is a solid financial base, backed by a reliable revenue collection mechanism. All social insurance systems, whether pension, health insurance, disability or unemployment, need effective coverage, so that most people who become entitled to benefits also contribute to the system. Based on the ability-to-pay principle, income earners participate in financing the system as contributors, while some categories of non-income earning individuals are subsidized by the state.

If the collection systems are not robust, and not carefully administered and controlled, effective coverage becomes a serious issue, and a free-rider problem can become endemic. Individuals can then enter the system without making their required share of contributions, making the system financially burdensome, and requiring greater subsidization by the state, thus threatening the very viability of the system. Governments in many countries are, therefore, looking at ways to improve the revenue collection system, while making voluntary compliance attractive for taxpayers.

Consolidation of collection of the main government revenues in one specialized and professional revenue agency is increasing being considered as a logical aspect of strategic fiscal reforms in many countries. Many countries already have long established common revenue collection under tax administration. Others are reforming their systems to integrate collection functions in the tax administration. Countries that have moved to integrate social contribution collection functions into a common revenue administration have generally found that the marginal costs of extending the systems used for tax

1 A combined Executive Summary for both volumes appears at the beginning of Volume I.

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administration to include social security contributions are relatively small, while the efficiency gains are significant.2

It is well understood that tax administrations have core competency in revenue collection functions while the social security agencies have core competencies in determining personalized entitlements to benefits, management of assets, and disbursement of social benefits. It is argued that entrusting collection responsibilities to the tax administration eliminates duplication in identifying and registering non-filers, processing of declarations, audit and investigation and enforced collection functions, and thereby reduces administrative costs. It also eliminates the need for employers and other taxpayers to post collections to several different government agencies, thus saving businesses time and money. Reduction in the number of collection agents entitled to audit taxpayers’ accounts is also a corruption-fighting measure as it reduces the opportunities for officials to demand bribes from business.

With this background, the Government of the Czech Republic adopted Resolution No. 1462, dated 20 December 2006, and proposed a consolidation plan with the aim of simplifying and rationalizing administration of taxes, customs and social payments to increase internal and external efficiency, and improving the transparency and effectiveness of these agencies in fighting tax evasion in an integrated manner.

From a revenue administration point of view, pension and other social insurance contributions are taxes, often referred to as ‘payroll taxes’, levied on employers and employees, and usually collected by employers as withholding, or directly, in the case of self-employed and certain other categories of contributors. Although, in the case of payroll taxes, separate accounts have to be maintained for individual contributions, many of the same features of revenue collection apply to payroll taxes and personal income tax.

At the same time, it is also well accepted that, even in respect of revenue collection, tax administrations and social security institutions have different needs regarding database management of individual contributors, period of retention of income information, and issue of periodic account information to contributors. Often the assessment bases and the individuals covered under the two systems are not identical. Usually, under the tax system, persons below a certain threshold are not liable to pay taxes, and no record is kept of such individuals. However, under the social security system, the population coverage is usually wider and often not restricted to contributors alone.

While the differences mentioned above add complexity to integration initiatives, these have been found to be surmountable. Given the advantages an integrated system brings, most countries have benefited well from the transition to integrated revenue collection.

A successful integration process must take a wide array of relevant political, administrative, legislative, budgetary and staff issues into consideration. However,

2 Peter Barrand, Stanford Ross and Graham Harrison, Integrating a Unified Revenue Administration for Tax and Social Contributions: Experiences of Central and Eastern European Countries, IMF Working Paper, December 2004.

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integration by itself should not be taken as a magic potion for the cure of the weaknesses of coverage and inefficiencies of revenue collection. Integration offers a foundation on which sound revenue administration can be based. The ultimate test is whether it results in better coverage, increased collection, improved quality of service for citizens and savings in administrative costs. The success of the initiative will depend on:

Strong and sustained leadership and ownership by the Government;

Involvement of staff at all levels in the design of the integration;

Wide consultation with representatives of stakeholders to determine how best to develop a new unified collection system;

A constant feedback on what did not work, or what might have worked better.

In the following chapters of the report, we will present our findings and observations of the existing systems and make recommendations on a roadmap for integration.

2. THE STRUCTURE OF THE REPORT

The report begins with a discussion of strategic objectives of the integration and measures to achieve them, drawing on international best practices. Chapter 2 identifies the following strategic goals of integration: improved efficiency; simplified and rationalized revenue administration; prevention of tax evasion and improved incentives to pay taxes. The strategy for reducing the compliance burden and improving the business environment is then discussed. The particular strategic measures required to improve collection effectiveness and efficiency are described.

Chapter 3 offers a preliminary assessment of the social security, health insurance, and tax administration in their current state. Key strengths and weaknesses of all three sets of agencies are discussed. The main finding is that the agencies are in various stages of administrative, institutional and IT reform, which poses specific challenges for their integration.

Chapter 4 attempts to demonstrate how integration can work in practice. It first discusses historically the international experience with integration, and then offers a case study of Bulgaria as a model for successful integration. Bulgaria has been named a revenue administration top reformer, and there are important lessons to be learned from its experience. Bulgaria created a new revenue agency from scratch, as opposed to housing all revenue functions within one of the existing agencies. After the second year of this agency’s operation, revenue targets were exceeded by substantial margins while the restructuring of the agency continued.

Chapter 5 builds on the premise that the integration in the Czech Republic can only succeed if all interested parties are “on board.” A brief stakeholder analysis offered in this chapter suggests that in principle there is a broad-based political and social support for integration. While disagreements exist, they mostly concern sequencing and pace of the reform. Thus, the political situation is currently extremely favorable towards modernization and integration, although careful attention needs to be paid to finding

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consensus on the technical aspects where there is still some discord or misunderstanding of the process or its goals.

Chapter 6 offers a roadmap for integration. Integration will require institutional, organizational, business processes, and ICT changes, as well as agreement on time lines and sequencing. Institutionally, a management vision, comprehensive review of the existing agencies, and harmonization of the legal framework are the first steps toward integration. Organizationally, the objective of the restructuring should be to create a new management structure, and build executive and managerial capacity and technical skills of staff of a new revenue administration. The most comprehensive alignment will have to take place in the business processes and ICT system. Based on the discussions with the various stakeholders in the Czech Republic, the recommendation offered in the chapter is that the integration of revenue functions and the creation of a new Revenue Administration should be undertaken either following, or in parallel with, the modernization of the current tax administration. The chapter then outlines a proposed timeline and sequencing of integration, starting in 2008 and finishing in 2012.

Finally, Chapter 7 describes the most salient challenges and risks of the integration. These risks are both internal and external, including political, technical, institutional, and personnel. However, the chapter concludes that none of them is insurmountable and can be mitigated to acceptable levels.

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STRATEGIC OBJECTIVES OF Integrating revenue functions

A. INTRODUCTION

Governments often consider the integration of revenue collection as part of a financial management reform strategy to promote healthy private sector development. This is because integrated collection has the potential to deliver a win-win strategy that increases the efficiency and effectiveness of collection for the government while reducing the compliance burden of taxpayers and contributors. The overriding objective of integrating tax and social contributions collection is to achieve the best possible revenue collection performance, providing synergies between organizations and their core functions, and administrative and compliance cost reduction.

In many countries, a modern Treasury system supports the collection of tax and social contribution payments, providing the revenue agency with integrated real time information on receipts, and the budget department with real time information on expenditure. For the revenue agency, this allows the self-assessment approach to revenue collection to work efficiently and increases the administration’s capability to focus on identifying and promptly following up on deviant taxpayers/contributors and on serious tax fraud cases.

The Government of the Czech Republic, being concerned that both the collection costs of tax administration and social security agencies, and the compliance costs of taxpayers in the Czech Republic ranked among the highest in Europe, adopted Resolution No. 1462, dated 20 December 2006, instructing the Ministry of Finance, Ministry of Labor and Social Affairs and the Ministry of Health, to produce a material for the Draft Consolidation Procedures. The Government’s aim is to simplify and rationalize administration of taxes, customs and social contribution collection to increase internal and external efficiency, and to improve the effectiveness of these agencies in fighting against tax evasion in an integrated manner. It is also expected that the Program will increase the transparency of a modernized and integrated revenue agency.

The objectives include:

Improved efficiency, most notably by reducing the number of collection points, as well as reducing bureaucratic and administrative load.

Simplified and rationalized revenue administration, including provision of support for enterprises, improved taxpayer service, and making revenue administration and collection more transparent.

Prevention of tax evasion and improved incentives to pay taxes, which would involve emphasizing the new attitude toward compliance and changing the tax collection culture from punitive to voluntary compliance.

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The proposal to unify the collection of all social security contributions stipulates that all collections of contributions for basic pension, sickness insurance, unemployment insurance and health insurance will be integrated within the overall revenue collection function of the tax administration. Most of the social securities collections, except for those of self employed and some other exceptions are currently deposited by employers, either as the employers’ contributions or as withholdings of employees’ contributions from their wages. The unification of collection will not affect the benefits administration, which will continue to stay with the respective benefits administration agencies - the CSSA, the health insurance companies and the district labor offices (Table 2.1).

Table 2.1: Responsible Institutions for Social/Health Insurance Contribution Collection and Benefits Administration

In the context of improving efficiency and effectiveness of collection, as well as simplifying and rationalizing revenue administration with a view to reducing the compliance burden, strategic measures will need to be taken as part of revenue modernization strategy and reform.

B. STRATEGY FOR REDUCING COMPLIANCE BURDEN AND IMPROVING THE BUSINESS

ENVIRONMENT

Simplified harmonized regulatory framework. A key element of the strategy for reducing the compliance burden for businesses and individual taxpayers and contributors is to simplify the legal and regulatory framework that determines tax liabilities, including harmonization of bases for personal income tax and social contributions, to the extent

Insurance Type Collecting Institution Benefits Administration

Present Future Present Future

Invalidity CSSA Unified Revenue Administration

CSSA CSSA

Old Age CSSA Unified Revenue Administration

CSSA CSSA

Survivors CSSA Unified Revenue Administration

CSSA CSSA

Sickness/Maternity CSSA Unified Revenue Administration

CSSA CSSA

Unemployment CSSA Unified Revenue Administration

Employment Services - MOLSA (Labor Offices)

Employment Services - MOLSA (Labor Offices)

Work Injury/Disease

Private Insurance Companies (2)

Private Insurance Companies (2)

Private Insurance Companies (2)

Private Insurance Companies (2)

Health Insurance Health Insurance Companies (10)

Unified Revenue Administration

Health Insurance Companies (10)

Health Insurance Companies (10)

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possible. The current administrative and procedural regulations will need to be consolidated into a single document.

Use of e-government principles. Simplified forms and procedures for filing returns and payments, based on the use of e-commerce and e-government principles should be introduced. Paper documents should be used only as an exception. The resulting environment should become both easier for the government to administer and for taxpayers to comply with, at reduced cost.

Partnership with stakeholders. From the outset it is critical to establish a partnership with key private sector stakeholders – representing large international and local businesses, auditing and accounting advisory services, NGOs, etc. Their input on how to improve services to taxpayers and reduce the compliance burden should be sought. Planning for early wins is important, keeping in mind that results that are dependent on integrating complex ICT systems take a substantial amount of time to produce results. Early results on some gains from the reform are important to sustain the momentum for reforms among the key stakeholders, and prevent stakeholder fatigue.

One-stop shop and single window. One of the best ways to reduce compliance costs is to introduce a one-stop-shop covering most of the functions used by taxpayers/contributors. This should consist of both of an electronic one-stop-shop providing countrywide services, and physical points for single window services. At a minimum these should perform the following functions: registration, provide induction information on taxpayer responsibilities for new taxpayers, offer forms, brochures and mass taxpayer education programs for major changes in the legal framework3, provide advisory services on existing regulations, and issue taxpayer certificates. Additionally, taxpayer contact in the process of filing returns and payments should be automated to the extent possible.

Unencumbered access to tax and social security accounts. Revenue processing should be as prompt as possible, and should be quasi-immediate in the case of electronic filing. Taxpayers should be given unencumbered access to their account. Account transactions should be clearly stated and easy to understand. It should be simple for taxpayers to question and receive explanation when perceived or factual errors are identified.

Integrated revenue appeals system. An efficient and well balanced administrative appeals system must be put in place and taxpayers and contributors should be encouraged to use it instead of going to the courts to address grievances. Ideally, the taxpayer community should be represented in the appeals system. It is important to acknowledge that the push towards increased compliance may produce an increase in appeals. It is equally important that taxpayers perceive the appeals system as a fair and equitable means to resolve disputes with the revenue administration.

3 To be fair to taxpayers the Government must put in place a framework for declaration and payment that allows taxpayers to self-assess and pay their liabilities accurately, efficiently, and reliably.

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C. STRATEGIC MEASURES FOR IMPROVING COLLECTION EFFECTIVENESS AND

EFFICIENCY

Focus on compliance rather than routine functions. One of the key measures for improving the effectiveness and efficiency in revenue collection is to increase the focus of the revenue agency on compliance. Highly automated checking and desk audits should be used for small taxpayers where it may not be cost effective to use auditors. Compliance strategies need to be developed considerate of geographical and economic sector differences. Enforcing a similar tax base (while allowing for legally mandated deviations) across personal income tax and social contributions helps eliminate the possibility for selective compliance by taxpayers. Without harmonization of the bases, the increase in efficiency, and reduction in administrative and compliance burden would be reduced.

Redesign the organization and its management structure to reduce costs. The organizational and management system should be geared to reducing both administrative and compliance costs, as well as minimizing contacts between the tax official and taxpayer. Duplication of back-office business functions should be eliminated during the process of integration, while making every effort to retain the professional knowledge base of the institutions being integrated. Clear and distinct demarcation of the functions of headquarters, processing centers and tax offices has to be made. The organization and management systems of the office network should be standardized. The registration system, processing of returns and payments, management of large taxpayers, and informatics management, particularly databases, security, and application systems should be centralized. Centralization will help reduce costs, and help integrate the risk management for all taxpayers and contributors under a single system.

Well engineered business processes to promote integration. Business processes should be designed to promote efficiency and integration, and reduce the opportunity for corrupt practices. Business processes should create the enabling conditions for self-assessment to work well. Taxpayers and contributors should understand their responsibilities and be able to assess their liabilities and make payments using standard materials/tools provided by the revenue agency with minimal assistance.

Audit and enforcement. The audit and enforcement activities of the revenue agency should seek to promote a more level playing field in the economy that would result in fairer competition among businesses, thereby increasing the competitiveness of the economy. This can be achieved by reducing the compliance burden of compliant and honest taxpayers and increasing the burden of non-compliant taxpayers through increased detection rates and increased penalties for deviations.

Service delivery. Service delivery should be designed to focus on the provision of web-based modern electronic services both internally and externally with third-party data interchange partners and taxpayers. The functioning of the electronic interface should be designed to be as simple as possible, and as paperless as possible. Incentives should be built in for the use of an integrated and centralized call center for web and voice advice to taxpayers and contributors, so as to eliminate the need for a taxpayer to have to visit a tax

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office. Every time a taxpayer makes a decision to go to a tax office for filing or payment, this should be considered as a failure to create the enabling environment for self-assessment.

Real time information. Information on the collection of revenue should be provided to clients on a real time basis. This must include all information needed for the clients to perform their business function efficiently and effectively. The following are minimum information requirements for social security agencies: (i) registration; (ii) monthly declaration and payment flows at the individual level; (iii) arrears; and (iv) audit performance. It is also desirable that compliance information be made available. Social security agencies requiring longer term data storage than that required by the revenue agency should make their own arrangements for such storage.

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PRELIMINARY ASSESSMENT OF Social security, Health Insurance and TAX ADMINISTRATIONs

D. INTRODUCTION

A viable social security and pension system must have: (i) a reliable mechanism for collection of contributions; (ii) methodology and expertise for correct calculation and disbursement of benefits; (iii) a secure asset management system; a robust database on contributors and beneficiaries; and a prompt system of delivery of account statements and reports.

Most countries follow one of two basic models for social security administration: (i) a full-service social insurance institution model where all the major functions, including collection of contributions, and payment of benefits are administered by the institution; or (ii) a benefits institution model where the institution is concerned mainly with disbursement and accounting of benefits, while the collection function is administered by the tax administration.4

Traditionally, tax administrations develop core competencies in revenue collection functions and do so more efficiently than collections done by social security or pension agencies. Tax administrations develop a compliance-focused approach, and align their processes to identification and registration of non-filers, assessment and audit of declarations, investigation of tax evasion and fraud, and enforced collection of tax arrears.

Likewise social security agencies develop core competencies in personalized entitlements to benefits, management of assets, and disbursement of accurate social benefits to recipients. Accordingly, they align their processes to determining individual entitlements on a real time basis, examining claims to assess their accuracy, control for fraudulent or excessive claims, controlling service providers and insurers, client service for beneficiaries, contributors and employers, and providing efficient service delivery. Unlike tax administration, most social security systems require access to lifelong information on income, contributions, employment record and wage indexation.

In this chapter, we attempt a preliminary assessment of the current strengths and weaknesses of the revenue collection functions of Czech tax, social security and health insurance administrations. This allows us to compare them with best practices internationally. Such comparisons help us identify the gaps where attention needs to be focused when implementing their integration. The overall goal of revenue collection in

4 Peter Barrand, Stanford Ross and Graham Harrison, Integrating a Unified Revenue Administration for Tax and Social Contributions: Experiences of Central and Eastern European Countries, IMF Working Paper, December 2004.

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the Czech Republic, as elsewhere, is to increase compliance, reduce the revenue gap,5

and facilitate a healthy service-oriented approach. Success depends in equal measure on being efficient in dealing with those who comply voluntarily with their tax and revenue responsibilities, and on being effective in dealing with those who do not. The key to maximizing compliance is to make compliance attractive, while making noncompliance unattractive. This can be achieved by striking the right balance between client services and enforcement.

In the Czech general government revenues, taxes and social contributions account for about CZK1363 billion (36 percent of GDP). Social contributions account for a very significant portion (44 percent) of total revenues, or approximately 16 percent of GDP. These include a payroll tax of 13.5 percent for health insurance, and a payroll tax of 34 percent for social security contributions (28 percent for pensions, 4.4 percent for sickness insurance and 1.6 percent for unemployment insurance). Of the taxes, VAT accounts for about 7 percent, excises about 3.7 percent, corporate income tax about 4.4 percent and personal income tax about 3.7 percent. Collections from other smaller taxes account for less than one percent of GDP in aggregate (see Annexes 1 and 2).

The Ministry of Finance (MOF) is responsible for tax policy and legislation, and manages the Directorate General of Finance and the General Directorate of Customs. Health insurance issues are the responsibility of the Ministry of Health. Social policy is the responsibility of the Ministry of Labor and Social Affairs which supervises all civilian social protection related collections, enforcement, claims, and disbursements through the Czech Social Security Administration (CSSA), popularly known by its Czech initials as the “CSSZ”.

In the following paragraphs, we will examine the key features and the main challenges of the social security administration first, followed by those of the health insurance administration, and finally of the tax administration

E. KEY FEATURES AND CHALLENGES OF THE SOCIAL SECURITY

ADMINISTRATION

Key Features

Czech social insurance system. The Czech social security system consists of: (i) a first pillar, mandatory, defined benefit, pay-as-you-go (PAYG) pension scheme with a contribution rate of 28 percent; (ii) a sickness insurance with a contribution rate of 4.4 percent (of which the employer pays 3.3 percent); (iii) an unemployment insurance scheme with a contribution rate of 1.6 percent; (iv) a family benefits scheme; and (v) a workmen’s accident compensation. Under the aegis of the Ministry of Labor and Social Affairs (MOLSA), the workmen’s accident insurance is administered by two private insurance companies, while the local labor offices administer the family benefits and the unemployment insurance. The CSSA administers basic pension and sickness insurance,

5 Revenue gap is the difference between collected revenue and the potential revenue that could be collected if all taxpayers/contributors comply with their tax obligations.

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and also collects contributions for unemployment insurance, though does not administer it.

There have been discussions in the Government to introduce a second pillar pension based on limited opt-out from the basic scheme, as part of a 3-stage pension reforms. Likewise, under new legislation on sickness insurance, the wage compensation, and sickness and maternity benefits have been modified and the contribution rate for employers is being reduced to 2.3 percent in 2009 and to 1.4 percent in 2010

Structure and functions of the CSSA. The CSSA is a governmental body under MOLSA which performs the following key functions:

Collection of contributions for the basic pension, sickness insurance and unemployment insurance;

Calculation and payment of benefits for the basic pension and sickness insurance;

Keeping the database of all insured individuals under the basic pension and sickness insurance systems;

Undertaking medical assessments for sickness insurance and pension insurance; and

Fulfilling tasks under bilateral and multilateral treaty agreements.

Headquartered in Prague, CSSA has a network of 75 district offices and 12 in Prague. The large number of offices enables the CCSA to outreach to all sections of the community, including business and personal clients. It has 8500 employees, 2300 of which are in the headquarters and the rest in the district offices. It collects premiums from about 5 million insured persons, of which 3.2 million are employees of large organizations, about a million are employees of small organizations and 716,000 are self employed. In addition to the self employed, the CSSA and its district offices deal with 30,000 large firms and 230,000 small businesses.

The self employed contributions account for just over 5 percent of total collection. They file annual income and expenses overviews for the CSSA. Small organizations (with 25 employees at most), however, furnish monthly declarations to CSSA with a list of employees. CSSA also pays out pensions to 2.7 million pensioners. Until 1996 pension contribution collections were more than pension pay outs and expenses. However, between 1997 and 2003, the pension account was in deficit. Since 2004 the pension account has been in surplus again.

A typical district office of the CSSA has six departments: (i) Sickness; (ii) Self Employed; (iii) Pensions; (iv) Inspections; (v) Accounts; and (vi) Collection.

Modernization Efforts

The CSSA has successfully undertaken a program of business systems reform since 1995. It has modernized its office network, paying particular attention to the quality of environment for customers and staff. Modern facilities, including electronic queuing

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systems and kiosk-type information points, have been developed. A Call Center has been established in 2002, which answers queries on individual pension information and advice. There is also an Information Center in Prague where clients can visit for similar services.

In addition, CSSA is modernizing its business data platform through centralized or regional databases, digitizing paper archives, and developing e-business interfaces for report-filing and client registration. A key success is the establishment of individual person accounts that record employment and contribution data to enable social security benefits to be assessed. Every client can contact the CSSA once a year with a request to receive his/her personal pension insurance sheet which contains information on the period of insurance, annual assessment bases after 1985 and any periods after 1985 which are excluded from the calculation of a personal assessment base. At present, the CSSA is preparing to take-over all of the short-term sickness benefit administration. In advance of Czech Republic membership of the EU, the CSSA had to successfully implement a comprehensive system to coordinate social insurance records for migrant workers within the EU.

In summary, the CSSA has demonstrated that it has the management and institutional capacity to implement strategic administrative reform.

Challenges

Information sharing. Whilst the CSSA has successfully implemented some reform programs, it still faces significant challenges. The program of database centralization is resource-hungry and is expected to be completed within 3 years time. There is still widespread use of manual procedures, at the expense of automation and efficiency.

The present social insurance system is not linked in any structured way to the health or taxation systems. This facilitates selective non-compliance by taxpayers/contributors with the various collection systems and allows different data to be shown to each. In fact, investment in ICT by the CSSA overlaps with the same functions being carried out by the tax and health insurance administrations. While strictly defining the competencies of individual agencies in the legislation clearly demarcates the responsibilities of the CSSA and the health and tax institutions, the absence of provisions for structured linkages between the collection systems leads to inefficiencies and duplication.

Identification number. The 9 to 10 digit birth number is used as the personal identification number for all public information systems. Although a fairly good system, some are concerned that it contains personal information which could be misused. One handicap with the birth number is that it does not work very well for identification of foreign workers. Usually, a temporary number is generated for foreign workers based on their date of birth. Often complicated methods have to be used to automatically distinguish between foreign workers and Czech citizens.

Arrears. The total stock of collection arrears calculated since 1993 had been mounting every year until 2003 when it reached 63.8 billion CZK. The growth of cumulated arrears has stopped since 2004, and the stock of arrears has declined to 57.5 billion CZK. In

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2007, the cumulated arrears amounted to 1.7% of cumulated collection (3,375 billion CZK since 1993) and 16 percent of annual collection. About 60 percent of these arrears relate to deregistered payers, where collection may be more problematic.

Audit and risk management. The CSSA data shows that compliance rate is about 98 percent. This information could be misleading, as it measures compliance in filing and payments by already registered firms and self-employed. It does not take into account a potentially significant number of employees/workers who may not be registered, or firms that may be operating in the shadow, or underreporting salaries. Discussions with the CSSA officials indicated that the largest evasion of payroll taxes is by self employed and small businesses. In the absence of close collaboration with the tax administration, there is no sharing of information between the two agencies. This is complicated by the fact that shadow employment is monitored by the local Labor Inspectorate and not by the CSSA.

The CSSA audits every firm once in two years. That amounts to an average of about 150,000 large, medium and small firms every year. Larger firms are audited at the premises of the firm while small firms (up to 25 employees) come to the district offices of the CSSA. The existing audit and control system is inefficient and reflects a ‘checking’ process that is not risk-based. As a result, the focus is on ensuring the arithmetical correctness of whatever data is presented, rather than seeking to detect avoidance of registration, filing and contribution-paying responsibilities. There is no system of sharing risk profiles of taxpayers with the tax administration to determine which firms are low-risk, and need not be audited for many years, and which are high-risk, and need to be monitored more frequently. Having a standard two-year rule for all firms, places a compliance burden on honest firms, and releases focus on dishonest ones that need to be scrutinized more closely.

Compliance burden. The present contribution collection system imposes multiple costs on contributors and insured persons. This system requires multiple registrations with multiple institutions, multiple filing of similar data, multiple contribution and tax payments, and response to multiple audits of the same data. Much of this is duplicate work for both the CSSA (and health insurance companies and tax administration) and the client. Furthermore, CSSA is investing in technologies and business systems that perform such duplicated functions – resulting in wasteful over-investment across the CSSA, health insurance companies and tax administration.

Main focus. The businesses of revenue collection and social insurance service provision are becoming more complex. New legislation, increasing the scope of insured benefits and increasing demand for improved service, will place additional strains on the CSSA. The CSSA will be better positioned to cope with this scenario if the collection, audit and enforcement of collection are integrated within a common revenue administration, and the CSSA then focuses on its core business – providing social insurance benefits.

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F. KEY FEATURES AND CHALLENGES OF THE HEALTH INSURANCE SYSTEM

Key Features

Czech health insurance system. The Czech Republic has a universal, mandatory health insurance system covering all permanent residents, and all other individuals employed by Czech-based employers. The health insurance is individual-based, not family-based. Generally the contribution is 13.5 percent from the assessment base which differs for individual categories. For employees, the contribution is 13.5 percent (1/3 employee, 2/3 employer) of gross salary. The employer fulfils all the notification and monthly payment and declaration filing requirements. Self employed persons pay 13.5 percent from half their income minus expenses. For both employees and self-employed, the assessment base has a floor (linked to the minimum wage for employees, and to the national average wage for self employed) and a ceiling (linked to 48 times the national average wage). For the 53 percent of the population that is not in the workforce (children, pensioners, unemployed, students, etc.) the state pays their contributions on an assessment base that is 25 percent of the national average wage. In 2007 the state paid a monthly contribution of 677 CZK for each such person. About 30 percent of all premiums are thus paid by the state. There is a small residual group of person without taxed incomes who do not fall among the categories for which the state pays. For this group the assessment base is minimum wage.

Healthcare providers and health insurers. Individuals have freedom to choose their healthcare providers. They also have the choice between ten health insurers which are public institutions supervised by the state. The multiple-insurer system was introduced in 1993. The health insurance companies collect monthly insurance premium from their clients’ payrolls, provide client service, and maintain databases of their clients. The health insurers are the primary points of contact with the clients, both for the insured persons and the firms employing them.

Health insurance companies maintain their accounts in commercial banks. The expenditures and overheads of health insurance companies are regulated by a formula which provides a cap as a percentage of the premium collected. There is also a pooling mechanism in place by which payroll taxes (health insurance premiums) and all of the state contributions are redistributed based on the risk profile of policyholders.

More than 60 percent of the persons are insured with the General Health Insurance Corporation (Vseobecna Zdravotni Pojistovna), known popularly by its Czech acronym VZP. The other 9 insurers are much smaller and account for the remaining 40 percent of insured persons. The VZP also receives the largest amount of the contributions made by the state for the population outside the workforce. Insured persons are free to switch their health insurer and about 2 percent exercise this choice yearly.

The World Bank team visited the central headquarters of the VZP and of one of the smaller companies - Czech National Health Insurance Co. (CNZP). The VZP, the largest health insurer, has 14 regional and 76 district offices serving 6.5 million insured persons. They currently maintain the database of employees and employers at the local district

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level, although they are planning to centralize it soon. Individuals visit the VZP local offices for registration, deregistration, change in status, and to get information on their queries. Many also use the website and email for correspondences. The much smaller CNZP has 320,000 clients and a virtual paperless office. It maintains 43 branches (usually 1-2 staff) which are connected online. The IT system is impressive and developed in-house. The data system is online, and most activities, including billing notices and client-payer linkages are online and real time, with a secure portal for clients. Inspections are undertaken based on profiles that are self-generated from clients’ history of compliance.

Strengths

The health insurance system has a widespread office network. In some locations, more than one insurance company has established an office. The existence of multiple health insurance companies provides some choice for consumers and the potential for competition, based at least on service provision. Some companies have a high level of automation and are administratively very efficient. There is a possibility of some of the smaller health insurance companies being privatized over time. A central register of insured persons has been established, and this register includes persons for whom the state pays contributions. Within the planned reform of the system of public health insurance, there is a suggestion for privatization of health insurance companies. A central register of insured persons has been established which collects data about all insured persons.

Challenges

No incentive for maximizing revenues. Notwithstanding the strengths of the existing health insurance administration system, there are significant challenges ahead. The present system of separating contribution payment from the level of service entitlement, and the redistribution of contributions (based on risk-pooling criteria) across all health insurance companies, removes the incentive for any one health company to maximize contribution collection. This is compounded by a perverse taxpayer incentive because the level of service is not linked to the level of contribution.

Duplication of network and functions. The widespread office network leads to overlap, duplication of functions (registration, collection, control, etc.) and waste of scarce resources within the health insurance system. The overlap of client registration, contribution collection and control functions between the health system, the social insurance system and the tax system is also wasteful of scarce public administration resources. The multiplicity of registration and filing requirements is an unnecessary cost to business and insured persons. At present, each health insurance company undertakes its own technical and business system development, without integration with other health insurance institutions. This over-investment loads extra cost onto the health system.

Fragmented databases. In many cases, the data on the separate databases of the CSSA, health insurance companies and tax administration are for the same clients – though the lack of coordination means that such data can easily become fragmented or incorrect.

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This lack of structured interface between the various revenue collection systems facilitates selective non-compliance by contributors. Selective non-compliance confers cost advantages to non-compliant businesses over compliant business and thereby distorts competition in whatever business market they operate in.

G. KEY FEATURES AND CHALLENGES OF THE TAX ADMINISTRATION

Key Features

The Czech tax system is administered under a 3-tier structure with the Directorate General of Finance as the apex body working within the MOF. At the regional level, there are 8 Financial Directorates (FD), which manage199 Tax Offices (TO) at the local level, 13 of which have Special Audit Units. Together they perform all the revenue functions of taxpayer registration, return processing, collection, audit, investigation and enforcement of the main taxes, including the VAT (20 percent of total revenues), corporate income tax (11 percent of total) and personal income taxes (10 percent of total). Excise taxes (10 percent of total), currently collected by the Customs, is planned to be transferred to the tax administration.

The FDs the TOs not only collect taxes but also undertake budget functions relating to funding of schools, hospitals and sports complex, conducting financial audits, price audits, administering penalties for breach of budget discipline and supervising lottery and other gaming activities. Currently the Czech Tax Administration (CTA) employs over 16,000 staff. Of this, about 450 are involved in administration of funding, and about 150 are involved in financial inspections and price audits.

Strengths

Key competencies and adequate resources in collection and audit. Being the main revenue collection agency of the government, the tax administration’s core competency is in collection and audit. It has a large group of staff trained in audit, investigation of tax fraud and evasion, and in enforced collection. This makes the tax administration the best suited agency for comprehensive revenue collection functions of all taxes, including social contributions. Each tax office provides comprehensive service to taxpayers and has adequate resources to serve the collection functions for social contributions.

Widespread localized IT structure. CTA uses a widespread IT-structure, with servers in each local tax office. Tax declarations are mainly keyed in locally. Only one percent of declarations are filed electronically. Taxpayer information is fairly well organized at the local offices. A face-vet check is performed of each tax declaration in order to insure that all data is present for processing. The administration wishes to replace the existing systems over the coming years with more a more cohesive system.

Web-based interconnection to other government agencies. It was observed that the tax administration system - which appeared to use a legacy character-based user interface - had a good web-based interface with other government agencies such as the commercial courts where businesses are registered, and the statistical bureau. It appears that there is

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some internal capacity to establish and maintain real-time data flows, including third-party data, which are key to modern centralized revenue management systems.

Challenges

Fragmented and old IT system. In local tax offices, the taxpayer information seems to be reasonably well organized at the taxpayer level. Unfortunately, there are problems with the current methodology for storage and maintenance of taxpayer information. First, information seems to be stored at the local office level which makes it difficult to carry out cross-country investigation involving multiple taxpayers attached to different offices. The IT environment of the tax administration seems to be based on antiquated legacy systems that are character-based rather than a graphical user interface. The systems were not user-friendly nor were they stable enough for general deployment. Systems seem to be neither integrated nor able to efficiently exchange data with each other. The notion of automatic assessment of taxpayer risk was not apparent even at the local level.

Poor information base for individual taxpayers. One of the key requirements of a collection system for social contributions is availability of account information of each contributor on real time basis. Importantly, in the tax offices, key fiscal functions for wage earners are delegated to the employers. Comprehensive information in the case of individual taxpayers seems to be available only for those taxpayers who elect to prepare a declaration - mainly self employed, and those with income from sources other than just wages. Taxpayers who have only wage income, and for whom the employer withholds taxes, are not required to file declarations, and therefore information on them is scanty. In order to integrate social contributions, the tax administration will need to take over the fiscal functions relating to individual taxpayers from the employers, and maintain databases itself. It needs to considerably upgrade its databases and IT system to match the needs of individual contributors.

Low level of electronic filing. Electronic filing seems to have a low level of penetration among all users, business and individuals alike. We were told that the government has been successful in bringing down the cost of an electronic signature subscription, which might allow better penetration of electronic filing among business taxpayers but may very well continue to be a problem for individuals. Moreover, it appears to us that the requirement for double filing (signed return form in addition to the electronic filing) is a major impediment to progress. Currently, a tax return can be filed via email, and its authenticity can be verified later. The requirement for electronic signature (which is comparable to requiring a notarized signature on paper) for the filing of returns or electronic payments are contrary to well established tax administration principles in processing paper returns, when signatures are never verified.

Absence of centralized return processing. Tax return processing is handled locally by TOs. It was not evident that centralized taxpayer accounts exist and that taxpayers have online access to their accounts. As a result, it may be possible for refunds for one tax to be issued by a tax office when the taxpayer may have debts for the same tax or other taxes at a different office. This could be particularly detrimental to the collection of revenue (taxes and social contributions) from businesses operating country-wide.

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Within the Revenue Authority, local offices are interconnected. A taxpayer may, for instance, asks the Strakonice office for confirmation whether he/she is in arrears or not, and the Strakonice office can receive information from the Vimperk office or the �eská Lípa office, where he/she has tax liability. However, the lack of central return processing also indicates a large number of localized staff doing routine functions. There is scope for savings in considering a central return processing because of economies of scale. Introduction of central processing can be considered in connection with a reduction in the number of TOs.

Competencies spread thin over a large number of local tax offices. A large number of TOs means duplication of tasks. The present situation indicates a large number of low specialization staff doing routine functions. Maintaining a large number of offices with comprehensive functions in a situation where recruitment of specialized/high competences is difficult runs the risk of spreading these competencies thinly. This situation should be seen in both the light of integrating collection functions of social security and health insurance, and in an ever increasing globalized environment requiring greater specialization by the tax administration to be able to cope with complicated customers.

Weak risk management system. Risk assessment is done at the local level according to information available on local taxpayers. The systems do not allow the use of information relating to other TOs. As a result it is not possible to analyze risks and risk trends across the nation. The IT system does not support analysis of risk patterns across the nation and across industries, inhibiting information sharing and heightening the risk of repeating crime across TOs. The lack of centralized risk management systems makes it difficult for the tax administration to ensure the use of resources where they are most needed. There is very little centralized data to help deploy resources with the right competencies and in the right quantity. This may easily lead to risks of inefficient use of staff.

Non-revenue functions detract from main focus. Although the tax administration is strong on collection functions, about 600 of the staff in local offices is deployed on non-revenue budget functions relating to funding of schools, hospitals and sports complex, conducting financial audits, price audits, administering penalties for breach of budget discipline and supervising gaming activities. This detracts from the core revenue functions of registering taxpayers, processing returns, auditing cases based on risk assessment and investigating evasion. Before taking over the revenue functions of social security and health insurance, the Government will have to spin off the budget functions into a separate localized budget funding/inspection agency, so that the tax administration is a pure revenue collection agency.

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INTERNATIONAL EXPERIENCE IN INTEGRATION

H. INTRODUCTION

Increasing efficiency and effectiveness of revenue mobilization from taxes and social contributions, and avoiding duplication of collection efforts have been the main driving force for integrating the government’s collection functions into one revenue agency. Very often, integration is undertaken as part of a larger exercise of, and in parallel with, comprehensive modernization the revenue administration. Several countries have also successfully undertaken merger of the customs and tax administrations into one revenue agency, to improve their effectiveness6.

The concept of increasing the efficiency and effectiveness in revenue administration (and other areas of public administration) has been given much prominence over the past 10-15 years. The basic principle of integrating revenue administration is that it can lead to better performance by removing impediments to effective and efficient management while maintaining appropriate accountability and transparency in a public sector environment.

Most countries follow one of two models of the collection mechanism. In countries like France and Germany, as well as many CIS countries, and currently in the Czech Republic and Slovakia, there are two parallel collection systems, one for taxes and the other for social contributions. Many other countries have integrated collection systems, described as a governance regime that provides a revenue administration with greater specialization in all aspects of government revenues. Moreover, some countries have hybrid collection systems. In the United States, for instance, the largest integrated federal collection system co-exists with the largest network of private pension systems where contributions are typically paid to specialized pension fund managers.

While some 30-40 countries have integrated revenue authorities, there is no single common model.7 Integration of revenue functions embodies a series of policy choices that result in varying degrees of autonomy. A single revenue authority has been seen by some as a possible solution to critical problems, such as poor revenue performance, low rates of compliance, ineffective staff, and corruption. It has often been argued that integration can lead to improvements, including better accountability for results, synergies in administration across the revenue departments, and management based on professional skills.

Country experiences, though grounded in historical conditions, have been evolving. In Western Europe, for instance, parallel systems were historically the norm, although over time many have evolved into integrated systems - Italy, Sweden, Ireland and the United

6 This aspect is discussed in an earlier World Bank report on the merger of tax and customs administrations. 7 Countries that have integrated collection and related function of social contributions into a single revenue agency include Sweden, Norway, Finland, the Netherlands, Iceland, the United Kingdom, Ireland, Estonia, Latvia, Hungary, Slovenia, Croatia, Montenegro, Albania, Bulgaria, Romania, Armenia, Russia, Egypt, United States, Canada and Argentina.

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Kingdom. In countries like Australia, the United States and Canada, pension collections, from their inception, have been effectively integrated into the tax collection systems. Again, over time, other systems have become the dominant pension systems. For instance, in Australia, the mandatory second pillar, defined contribution system, and in the United States, the private pension schemes, both of which collecting directly from contributors, have become the primary pension provider. In several countries in Latin America, parallel systems evolved into integrated systems, and subsequently, private pension funds have become increasingly popular.

In many transition countries of Central and Eastern Europe and the CIS, there is a trend for moving from the parallel to the integrated model. Russia has moved towards an integrated system, although because of the initial weaknesses in the tax administration collection system itself, the integration has not yet established a system of prompt flow of information from the tax administration to the social institutions, resulting in deterioration in service to clients. Other countries like Estonia, Latvia, Hungary, Slovenia, and Croatia have successfully implemented integration of their revenue collection systems. Other, such as Albania, Bulgaria, Romania, and Montenegro are at various stages of the process of integration. Several others such as the Czech Republic, Slovakia, and Armenia have plans for integration.

To understand whether the integration concept might be useful in a particular context, an understanding of their design and scope is useful. Depending on specific policy choices made about design and scope, an integrated revenue authority may have more or less relative autonomy. It is important to appreciate that integration alone does not lead to improved effectiveness and taxpayer compliance. Its establishment must be coupled with a serious commitment and plan for modernization and reform.

In fact, modernization of revenue administration is ultimately the result of improvements in organizational structures, systems, and processes, including well-designed programs of services and enforcement, sound allocation of resources, and effective management. It is in this context that the Bulgarian experience in creating an integrated revenue agency coupled with serious modernization efforts will throw some light on the process of integration that the Czech Republic plans to initiate.

I. THE BULGARIAN EXPERIENCE

In the course of transition to a market economy, and in reformulating the role of government, Bulgaria confronted mounting evidence that its revenue collection administration needed a major institutional overhaul to enable it to mobilize revenues effectively and efficiently, as well as to accede to the European Union. Reviews of the existing collection agencies revealed an advanced Social Security Institute that was being modernized under a World Bank Loan, a Customs Agency in transition receiving assistance from the EU, but a General Tax Directorate (GTD) that, for numerous reasons, had fallen behind in processes, procedures, systems, and technology.

For the above reasons, it was considered too risky to attempt to use the General Tax Directorate as a base for integration. As a result, in early 2000, the Finance Minister

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proposed to the government the creation of a new National Revenue Administration (NRA) for Bulgaria which would consolidate the responsibilities for taxpayer services, registration, issuance of certificates, processing of returns and payments, audit, and arrears collection, and all other activities necessary to ensure taxpayer compliance with tax and social contributions.

Soon after, the Government enlisted technical assistance from the World Bank and the IMF to plan the creation of the agency. A strong and fully dedicated team was appointed by the cabinet to prepare the program for integration. The MOF provided strong leadership to the reform.

After detailed and careful preparation (see Box 1, below), the NRA started operations on January 1, 2006, with the project preparation team forming the core of the new agency management.

The NRA has been able to produce strong yearly results creating the conditions necessary for the Government to reduce tax rates at an impressive pace, even while increasing revenues. Table 4.1 below presents some key performance indicators:

Table 4.1: Selected Key Performance Indicators, 2002-2007

Baseline

2002 2003 2004 2005 2006 2007

ProjectTarget

2009

Revenues, % of GDP 18.6 20.1 22.3 22.7 21.2 24.7 n/a

Social & health contributions, % of GDP 9.5 10.7 10.2 9.9 7.4 7.6 n/a

Revenue collected to revenue target, % 99.0 107.4 113.6 111.1 115.3 110.0 n/a

SHC revenue collected to revenue target, % 96.1 100.0 101.5 101.9 106.9 108.8 n/a

Cost of collection, % of revenues 1.37 1.48 1.33 1.17 0.82 0.70 0.80

Revenues to revenue staff, thousand 977 1118 1288 1579 2004 2705 1460

Tax audit adjustments/number of audits, % 57.1 58.3 61.8 64.5 65.1 73.6 65.0

Amount of tax arrears, % of revenues 25.5 25.1 19.6 18.0 13.8 10.9 14.6

Tax declarations filed electronically 35.2 44.5 47.7 43.7 47.2 50.9 89

Source: NRA.

NRA management continues to be creative and devise further opportunities for gains in efficiency, quality of taxpayer service, and revenue collection. The second year of NRA operation has been successful with impressive results. Revenue targets were exceeded by substantial margins while the restructuring of the agency continued. Taxpayer surveys indicate NRA staff and clients, particularly large taxpayers, are more satisfied with the professionalism and integrity of revenue staff.

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Box 1. The Reform Measures in Bulgarian Experience in Integration

The Revenue Administration Reform Project was launched in Bulgaria in mid-2003. The following were salient characteristics of the steps taken based on the key recommendations

¾ Program design decisions were underpinned by analytical information rather than experience-based hunch which had traditionally not produced consistent revenue results.

¾ Compliance models for all taxes and social contributions were developed and later geographical and economic sector dimensions were added. Taxpayer studies of the social, economical, and technical reasons for noncompliance were carried out. International, particularly EU, experience in creating the basis for efficient private sector development was researched.

¾ The program was executed under formal change management methodologies given the complexity of the task. Project management methodologies were fully integrated into the change management approach.

¾ The legal framework was integrated and modernized. The tax bases, procedures and business processes were simplified and harmonized.

¾ Conditions were created for early gains which would facilitate future integrations.

¾ A new National Revenue Agency (NRA) was created. The Board of the NRA was chaired by the Minister of Finance and included the heads of the all budgetary institutions for which the NRA collected revenue.

¾ The field office network was reduced from 416 regional and local offices to 28 regional offices and an LTU. Simultaneously, the responsibility for collecting local taxes and fees was moved to local governments as part of political changes in redistributing the responsibility for government.

¾ A solid recruitment strategy was put in place to select NRA staff with the old GTD and the Social Security Institute being important source of experienced staff.

¾ Retraining and placement services were in place for about two years prior to find opportunities for staff that either chose not to apply or were not selected into the NRA. Most commonly those employees found jobs with local governments and private companies.

¾ Human resource management conditions were created for NRA staff to be professional, with modern skills and with a high level of probity. Processes were automated, and the need for less-skilled, support and administrative staff was minimized.

¾ In order to maximize efficiency, analytical services and policy design, processes and procedures, and routine processing were centralized in the headquarters of the NRA. Business processes were re-engineered to reflect best EU practice.

¾ To reduce opportunities for corruption, contact between taxpayer and tax officials was minimized by encouraging electronic filing, payment and taxpayer services. However, taxpayer service that might require person-to-person services was decentralized.

¾ A strong focus was given to taxpayer compliance management using a mix of taxpayer segmentation and functional organization principles.

¾ Measures were taken to continuously reduce the compliance costs for compliant taxpayers and to increase the costs for noncompliant taxpayers so as to make paying taxes a rational business decision.

¾ Plans were drawn up for early and continuous annual gains in terms of revenue collection and compliance through detailed annual plans covering the key areas of business, particularly audit and enforcement. Performance and success indicators easily understood by all stakeholders were drawn up.

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The reform has promoted significant improvements in tax policy and administration in Bulgaria, making the country the top reformer in tax systems in 2006-07 out of 178 economies according to Doing Business and Paying Taxes 2008 reports. This was a combined result of the reduction of tax and social security burden and simplified process of paying taxes. Corporate income tax rate was reduced from 15 to 10% in 2007 and social contribution rates were cut by 7% in 2006/07. Bulgaria is now one of the leaders in the EU in terms of lowering the tax burden on businesses with one of the lowest total tax rates (37%) in the EU.

A few challenges remain. Electronic filing has not progressed as far as anticipated because of constraints imposed by the electronic signature law, which is affecting the adoption of electronic filing by individuals in spite of a system of incentives put in place by the NRA.

To assist in the design of the next round of optimizations, the NRA put in place a partnership with Consultative Council representing businesses, trade unions, accounting and auditing profession, and NGOs. The Consultative Council convenes every two months to advise top NRA management on key reform initiatives and make proposals for streamlining and simplifying procedures.

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ASSESSMENT OF STAKEHOLDER SUPPORT FOR INTEGRATION

A. POLITICAL CONSENSUS AS A PRECONDITION FOR SUCCESS

Integration of revenue functions of social security and health insurance with tax can only succeed if all interested parties are “on board.” This means that not only the agencies to be merged have agreed to the merger, but also the interests within the society, i.e. the stakeholders who will be affected by the reform have endorsed the merger and are at ease with its impacts.

There are three major groups of stakeholders in the integration: private sector, such as organized business and entrepreneurs; organized labor, i.e., the Labor Union of Public Service Employees, and political parties. We now analyze their stance toward integration.

B. PRIVATE SECTOR

Discussions with the representatives of entrepreneurs revealed that they support the merger in principle. The underlying reason is that from the client perspective, private sector representatives prefer a “one-stop shop” for all their payments to the state. There is a view that the integration of revenue functions would simplify matters for businesses; also, dealing with only one type of control and audit is seen as preferable to the current situation.

However, private sector representatives voiced several concerns about the integration. First, there is an overwhelming view that tax administration must be modernized first, prior to any merger, as it is perceived by businesses as relatively more obsolete and inefficient than other agencies. Second, change is required in the type of controls that CSSA and FO conduct. Private sector representatives complain that currently the controls are document-based. This means that they burden honest businesses, while shadow businesses are not affected. Finally, the single most significant problem for businesses seems to be the confusing and internally contradictory legislation governing collection of all payments to the state. In other words, integration alone cannot solve all that is amiss with the current system. A legislative overhaul is the first on the minds of businesses.

C. ORGANIZED LABOR

Quite naturally, the position of the labor union of the public sector employees towards integration is cautious. Labor representatives insist on a slow and gradual integration, preceded by modernization of tax administration. The modernization of tax administration is key for the Union. The fear here is that the obsolete tax administration to be merged with relatively modern remaining agencies would negatively affect the functioning of the existing systems.

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Further, Union leaders point to the risks of integrating fast without careful understanding of international experience, and insist that stock be taken of the international successes, but also failures. Because there is no consensus in the international practice about integrated or separated agencies, the Union calls for considering the Czech specifics in light of best international practices of both integrated and separated systems.

Union leaders emphasize their support for modernization of revenue administration. They also admit that modernization will likely bring the need to reduce the number of employees. However, organized labor warns of political impossibility of massive layoffs of civil servants. Although there is no civil service law currently in the Czech Republic, layoffs in the local offices would be very difficult to push through. This is mostly due to the clout of municipal governments that see local offices as part of their political machine.

D. POLITICAL PARTIES

Due to the parliamentary and proportional representation system in the Czech Republic, there are a large number of parties in the country with different platforms. However, the most relevant for the purposes of the current exercise are the two major parties: center-right ODS (current leader of the governing coalition) and left-leaning CSSD (current largest opposition party). Elections loom in 2010, and either of the two parties has a chance to be a new government leader. Therefore, for the integration to have good prospects to be implemented and accepted, it must be embraced by both parties.

Current government ODS strongly supports integration. In fact, ODS prefers fast pace of reform with horizons by 2010, to be able to claim credit for implementing the integration. However, there are some concerns that ODS is not fully unified behind this idea; yet party leaders dismiss any such disagreement as something that can be solved by communication. Still, concerns emerge that although tax administration reform is crucial, it is not yet a “framed issue” in the public discourse in the Czech Republic. In other words, to secure support for tax administration modernization by the electorate, ODS would need to invest in this issue, which may be risky.

On the other side of the spectrum, the current opposition leader, CSSD, supports integration as long as the following conditions are met. First, CSSD emphasizes a proper sequencing of merging different functions, following best international practices. Second, the opposition insists on consulting organized labor at every step of the integration and addressing their needs. Finally, the party leaders believe that excise duties should continue being enforced by customs. Overall, CSSD prefers a slower pace of the integration, and is ready to support the reform now and beyond 2010.

E. CONCLUSIONS

On balance, the brief analysis above suggests that in principle, there is a broad-based political and social support for integration. While disagreements exist, they mostly

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concern sequencing and pace of the reform. Quite crucially, most groups recognize and/or emphasize modernization of tax administration as a first step towards integration of revenue functions. Thus, one can say that the political situation is currently extremely favorable towards modernization and integration, although careful attention needs to be paid to finding consensus on the technical aspects where there is still some discord or misunderstanding of the process or its goals.

Finally, it must be noted that the above three groups are really only the most prominent stakeholders. Other players whose interests will play out “downstream,” i.e. after a particular model, sequence, and pace of the integration are chosen, are municipalities (and local government in general) and the agencies themselves. Therefore, the process must embed their interests at the very start.

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roadmap for INTEGRATION

J. CONTEXT

From the discussions in the preceding chapters, based on the examination of: (i) the main features of the tax administration and social insurance institutions; (ii) international experience; (iii) the strategic objectives; and (iv) stakeholder support, the following positions can be stipulated:

¾ Many countries that have integrated the collection of government revenues in one unified revenue agency as a logical aspect of strategic fiscal reforms have benefited well from the reform.

¾ There is strong ownership and commitment in the Government for integration as a means for improving the efficiency and effectiveness of revenue collection at lower costs to the budget and lower burden to taxpayers.

¾ There is broad-based political and support for integration among the key stakeholders.

¾ From a revenue administration perspective, pension and other social insurance contributions are taxes – payroll taxes.

¾ Tax administrations have core competency in revenue collection functions.

¾ Social security agencies have core competencies in determining personalized entitlements to benefits, management of assets, and disbursement of social benefits.

¾ Revenue collection functions apply similarly to payroll taxes as to personal income tax.

¾ An integrated tax administration should not be carrying out budget functions. Therefore the Finance Directorates carrying out the budget functions should be bifurcated from the purely revenue-oriented Revenue Administration.

¾ Tax administrations and social security institutions have different database needs regarding individual contributors, period of retention of information, and periodic account information to contributors.

¾ The assessment bases, and the individuals covered, under the two systems are not always identical.

While the differences add complexity to integration initiatives, these have been found to be generally surmountable, and most countries have benefited well from the advantages that an integrated system brings. Countries taking the decision to integrate their revenue collection systems must consider the capacity of the tax administration to achieve a high level of effectiveness with the data requirement of the social security systems. While the principles of collection are very similar, and can be easily aligned, special arrangements

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and significant investment in IT, data management and archiving will have to be made in the tax administration to maintain account information of individual contributors and their information transferred accurately to the social institutions.

K. KEY INITIAL STEPS

Develop indicators of success. Support for integration the revenue functions of taxes and social contributions will be strong only if the initiative provides demonstrable benefits to the stakeholders which are perceived as early as possible. This would require extensive stakeholder consultation. The agreed benefits of integration will give clear focus to the tasks and deliverables. Specific measurable, realistic, and achievable objectives will need to be assigned for the different levels of the revenue administration in the framework of annual operational planning. A set of significant performance indicators in all areas of activity should be developed, which takes into account quantitative and qualitative aspects of the merging agencies administration, and which is regularly reviewed and improved.

The following main indicators of success can be identified:

improved collection, control and compliance of income tax, social security contribution and health insurance premiums;

reduced costs for the revenue administration;

reduced compliance burden and costs for firms and individual taxpayers;

elimination of duplication in legislation, and business processes;

standardized key functions and processes and improved transparency; and

improved client service and consumer confidence.

Gap analysis, needs assessment and strategy. Before considering a choice of governance model for the revenue administration, certain preparatory steps will be necessary (Chart 1). After a consensus is reached, and the main indicators of success are identified, Government should carry out a detailed gap analysis to identify and articulate problems and deficiencies. The gap analysis should examine technical shortfalls (legislation, procedures, forms, infrastructure, IT and equipments) as well as behavioral shortfalls (practices, knowledge, skills, absorption capacity and attitudes). Only after a proper diagnosis is undertaken should a full needs assessment be made of the extent of training, technical assistance and infrastructure investment needs, which the governance model might satisfy. An implementation plan with clear priorities of actions based on international best practice and a strategy for change management can then be developed.

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Chart 1. Preparatory Steps

Whatever the governance model, strong and sustained political leadership and political commitment is of the utmost importance in establishing and maintaining a professional and effective revenue administration. The Government must decide on the tools and strategies that best fit the motive behind the integration. Professional assistance may be needed to develop these tools and strategies.

In the following paragraphs, we will lay out the roadmap for the integration of the revenue functions of CSSA and health insurance companies with the tax administration, and the creation of a new unified revenue agency. We have highlighted the key ingredients of institutional reform, organizational restructuring, business process re-engineering and the investment requirements in information and communication technology (ICT). This is, of course, based on the preliminary assessment made by the World Bank team in Prague and some field offices, and will, of necessity, need further elaboration.

L. INSTITUTIONAL

At the outset, there should be agreement on the vision of the newly unified revenue agency, so that there is clear understanding on what the agency will look like. The clear vision of the objectives of integration needs to be followed by defining the right level of

OBTAIN CONSENSUS ON INTEGRATION

IDENTIFY INDICATORS OF SUCCESS

GAP ANALYSIS (TECHNICAL AND BEHAVIORAL GAPS)

NEEDS ASSESSMENT (TRAINING, TECHNICAL ASSISTANCE, INVESTMENT IN I.T. INFRASTRUCTURE)

IMPLEMENTATION PLAN (DESCRIPTION OF ACTIONS

DATE AND DURATION TARGET DEPARTMENT

RESPONSIBLE PERSON OR UNIT)

CHANGE MANAGEMENT

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institutional integration. This should aim at establishing a comprehensive legal framework that will ensure compliance with tax, social security and health insurance legislation.

To achieve this, a comprehensive review of the existing institutional frameworks of the combining agencies should be undertaken, to clearly demarcate units or structures at the central and local levels that need to be migrated, taking into account their respective specialization in revenue functions (registration, collection, accounting, audit and investigation). Based on the institutional review, the proposed institutional framework for the unified revenue administration should be developed.

The new structure should take into account the complexity of the rules and procedures of the different agencies, whose revenue functions are being integrated, and the rights, responsibilities and expectations of their different categories of clientele. Integration should be undertaken both at the operational and functional levels, and geographically at the central, regional, and local levels.

Likewise, comprehensive review and analysis of the tax system laws, health insurance laws, social security laws, as well as other applicable laws, should be undertaken, to identify issues in revenue functions that need to be harmonized. For instance, it would be important to identify the different assessment bases, and, to the extent possible, a harmonized and unified base should be established. It is obvious that a number of laws must be amended and this again will require adequate time to comply.

The income tax provisions which require the tax administration to maintain information of employers, and not the employees, should be changed, and legal requirement should be established to ensure that the new revenue agency is able to obtain and store real time information of collection from individual taxpayers and contributors.

Similarly, the legal framework for the registration system, declaration processing and audit procedures need to be harmonized and unified. An integrated risk management system should be established with legal requirement to cross-check information from one agency with another.

The new institutional framework should take into account future developments and reforms in the pension and health insurance system, such as the possible privatization of health insurance companies, and should be flexible enough to leave room for such developments, both anticipated and unanticipated.

M. ORGANIZATIONAL

The objective of organizational restructuring should be to create a new management structure, and build executive and managerial capacity and technical skills of staff of a new revenue administration that is specialized in the tasks and requirements not just of tax collection, but also of collection of social contributions, and maintaining real time information on all its clients.

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One of the first organizational step, and even prior to integration of revenue collection functions should be to spin off the budgetary functions of the Finance Directorate. The new consolidated Revenue Administration should be separated from the Financial Directorates which could carry on the existing budgetary-functions at the local level. The appropriate modality of whether the budgetary functions can be stand alone offices in each district, or be attached to the district government functions will need to be worked out.

It is important for the success of the integration initiative that the process is not perceived as a take over of some units of CSSA and health insurance companies by the tax administration, but as the creation of a new revenue administration where all the concerned agencies participate and the synergies of the integrating units are utilized to the maximum. Thus the management board of the new revenue administration should be chaired by the Finance Minister, and should include the Minister of Health and the Minister of Social Affairs as members.

A dynamic Chairman of the Revenue Administration, committed to the ideals of integration and collaboration, should be appointed with a competent project management and change management team that could function as the Modernization and Strategic Development Unit (MSDU). The Chairman should carry the responsibility of leadership for the integration, and will become the focal point of the process for politicians, other government departments, employees, the general public and international agencies. The power and ability to provide the required leadership is vital to the success of the integration. The Chairman should have easy access to the management board, so that political decisions on the institutional and organizational arrangements can be processed through the Cabinet and the Parliament.

The project management team should include senior heads or deputy heads of all the relevant departments that will undergo change and modernization. This will ensure that the reform is not only implemented, but also sustained throughout the organization.

Inter-agency working groups should be set up for planning the organizational integrating the different specialized functions - registration, return processing and payment accounting, audit, and investigation. The legislative drafting group should be involved in these discussions, so that the lawyers can understand the intent of the various measures that would require legislative amendments.

The project management and change management team, MSDU should identify the functions of the new agency and create an organizational framework. A detailed implementation plan, laying down the structure for the new organization, the staffing plan, and the financial requirements and sources of funding should be developed. Classification by target functions should be used as the organizing framework, and the resource requirements, in terms of staff and their skill mix, as well as software, hardware and office facilities should be earmarked.

In order to ensure ownership of the new agency by all its predecessors, competent staff with requisite skills in revenue collection, investigation, IT, database management and

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archiving from tax administration, CSSA and health insurance companies should have the opportunity to apply for positions in the new revenue agency.

Since the new Revenue Administration will be based on modern principles of centralized processing, integrated risk management and an integrated IT system with centralized data management and archiving, it will require many new skills for which the existing staff will need to be trained. Human resource management will therefore be an important element of the organizational restructuring. Many low-end local routine functions may become redundant. Likewise, the budget functions of the Financial Directorates will have to be separated from the new Revenue Administration. Therefore, the project should establish, for a couple of years, a recruitment, redeployment and re-training unit that should proactively seek jobs and retrain employees that will be redundant. Some of them could be absorbed in the units of the Financial Directorates that carry out budget functions. Others can be trained in new skills that are either needed in the new Revenue Administration, or are marketable in the local government or the private sector.

Involvement of staff at all levels is critical to ensure the ownership of the process. Their involvement in and responsibility for the design of the new organizational structure and its internal re-engineering will give opportunity for staff to put their own stamp on the new organization. Management and specialist teams will need to work out the highly complex details of implementation. This will serve to both calm fears and provide a sense of ownership of the integrated organization. The integration process should also involve wide consultation with representative groups of clients to determine how best to develop new unified services.

N. BUSINESS PROCESSES

The strategic plan for integration of revenue collection systems should comprise explicit strategic business process objectives and service delivery milestones. The strategy will enable the CSSA and the health insurance companies to focus on their core business –providing cash benefit and health services to their customers. Revenue collection will be entrusted to a unified revenue administration. The unified revenue collection agency model will provide a framework within which to reduce business costs, reduce administration overhead, improve customer service, improve data quality and maximize tax and contribution revenue collection.

One-stop-shop. These key objectives will require developing a business model that utilizes a one-stop-shop system of: client registration, tax and contribution data filing, audit and sanction, and accounts reconciliation. The deployment of automated and centralized processing systems will enable business function rationalization and streamlining across all participating institutions. Clients will be presented with new ways of transacting their tax and social insurance contribution business – with less cost and time overhead.

Individual centered database. This will require engineering the unified revenue administration so that it can group into front and back-office processes. Currently, the tax administration stores data only of employers, and delegates the storage of employees’

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data to employers. The key system component will need be an integrated, individual-centered database of natural persons (taxpayers and contributors). Electronic registration, filing and data retrieval will be maximized throughout all system components.

Service agreements between agencies. The development of a unified revenue collection system will be accompanied by Service Agreement (SA) between the revenue administration and the social and health insurance institutions. The SA will govern the structured business interface between them, including how data will be accessed, updated, transferred and shared. The SA will include performance benchmarks that will ensure that the revenue collection system reaches collection, data control, quality and audit targets that have been agreed with the participating institutions. This will help safeguard the interests of those institutions that have transferred their revenue collection function to the new revenue agency.

Data migration issues. Within the project management team, a task force should be created consisting of staff from the revenue administration and all the agencies whose data are to be migrated, so that all data migration issues from different sources are well coordinated.

Document management and long-term archiving. The unified revenue administration will need to utilize electronic document management for storing data for approximately 10 years. The social and health insurance institutions require contributor data for up to 50 years or more. The methodology should be that the social contribution data is transferred systematically from the revenue administration to the social and health insurance institutions, who will be responsible for long-term archival of such data - in accordance with their business requirements. This will also need modern communications technology in the revenue administration for prompt transmission of accurate contribution collection information to the social and health insurance institutions.

Integrated audit and control mechanism. An integrated audit and control system will need to be established to correlate data across revenue types and thereby improve revenue collection compliance. Similarly, a rationalized sanction regime will be developed which will ensure consistency of penalties and eliminate multiple penalties for essentially the same offense.

O. INFORMATION AND COMMUNICATIONS TECHNOLOGY

There are two main handicaps with the IT environment in the existing tax administration. First, it is rather cumbersome, based on antiquated, character-based legacy systems. Data is stored at the local office level which makes it difficult to carry out cross-country utilization and centralized operations. Second, it does not store data of individual employees who have only wage income, or those who make use of the joint declaration with spouse.

The new integrated revenue system will have to overcome both these handicaps. This will only be made possible through sizeable investment in ICT, to complement the business system improvement discussed above. This new system will require:

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¾ a central database system (including information, registration, data collection, payment reconciliation, management accounting and audit functionalities;

¾ centralized declaration and payment processing, using front/back office models;

¾ high-speed broadband network linking every office in every geographical location to each other and to the central database;

¾ a management intranet system to facilitate planning, communication and office related functions within the revenue administration;

¾ a web-based portal through which customers can electronically access the full range of services, complementary to the front/back office model; and

¾ an integrated electronic document management and archiving system.

The system should be managed by an ICT business unit that should be represented at the highest level of management - in accordance with the strategic importance of ICT to the success of the new unified revenue collection agency.

As an interim measure, during transition to an integrated system, the existing collection database systems of the CSSA and the health insurance companies should be migrated to the unified revenue administration. The scope of the new revenue administration should be formulated and agreed, outputs defined and resource allocated before the development of the design and functionality of the systems. The scope should lay down exactly what services will be covered under the new system, who will host and manage the system, and which agencies will use the system.

P. TIMELINE AND SEQUENCING

Institutional reform such as the creation of a single revenue agency for collection of all taxes and social contributions is a multi-stage process. Determining the appropriate sequencing of integrating the revenue functions of tax administration, CSSA and the health insurance companies is crucial. The motives and strategies must be linked; and the implementation process must be carefully sequenced and necessary adjustments made.

Based on the discussions with the various stakeholders in the Czech Republic, it is recommended that the integration of revenue functions and the creation of a new revenue administration should be undertaken either following, or in parallel with, the modernization of the current tax administration. Table 6.1 shows the recommended sequence with approximate dates that will help structure the integration process in logical steps:

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Table 6.1: Timeline and Sequencing of Integration

Q3 - 2008

Reach political consensus on the integration of revenue functions of tax, customs and social contributions, and the level and intensity of integration. Develop key indicators of success.

Q3 - 2008

Create a Management Board chaired by the Finance Minister and with the Minister for Health and Minister for Social Affairs as members to oversee the integration.

Q3 - 2008 Establish an appropriate governance structure to manage, coordinate, and oversee the modernization and integration process. Appoint a transition team and a Modernization and Strategic Development Unit. Appoint a highly motivated chief of MSDU and a project management team.

Q3 - 2008 Conduct gap analysis of legislation, procedures, forms, infrastructure, IT, equipments as well as of behavioral gaps.

Q4 - 2008 Review and develop proposals for the new legal framework, modernization program, and institutional arrangements of the new Revenue Administration.

Q4 - 2008 Conduct needs assessment of training, TA and investment.

Q1 – 2009 Develop the organizational structure, management system, and HR strategy. Develop a detailed implementation plan, laying down the staffing plan, and the financial requirements and sources of funding.

Q1 – 2009 Allocate resources for the modernization and integration project.

Q1 – 2009 Revise tax and social contribution legislation and harmonize the tax base.

Q1 - 2009 Develop models for business processes and agency architecture.

Q1- 2009 to Q4 - 2009

Migrate budget functions of the Financial Directorates out of the Revenue Administration, and into a stand alone Financial Administration without revenue functions.

Plan and migrate physical infrastructure.

Q1- 2009 to Q4 - 2012

Develop business systems and, IT infrastructure, including data management and archiving systems.

Q1- 2010 to Q4 - 2012

Phased migration of functions – (i) integrated audit and inspection; (ii) integrated registration; (iii) integrated revenue filing and payment accounting; and (iv) common risk management.

Q1- 2010 to Q4 - 2011

Create a redeployment unit. Undertake phased redeployment, recruitment, retraining of staff.

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RISKS AND CHALLENGES

The social insurance, health insurance and taxation systems are strategically mission-critical systems for the Czech Government. They must not fail. Integrating key components, such as client registration, revenue collection and audit, constitutes major surgery to the present social and health insurance system and is not without significant risk. There are endogenous and exogenous risk factors.

Tax administration and social security agencies have different data management requirements. Internally, there is the possibility that important existing institutional knowledge in the social and health insurance institutions could be lost in the transition of the data management systems. There is some uncertainty over future resources that can be applied to important existing reform projects (centralizing CSSA database) that will support the integration strategy - with the result that delays could occur that will spill-over to a revenue collection integration project. The CSSA is tasked with taking over all of the sickness and maternity benefit processing from employers. This will place additional strain on CSSA resources during 2008-09.

A clear demarcation of the roles and responsibilities of each organization will have to be made. For instance, the new revenue administration will have full responsibility for collection, audit and investigation, enforced collection, and identification of non-filers. Likewise the responsibility for registering of taxpayers and contributors will have to be determined. The social security agencies will have exclusive responsibility for determination of services, benefits, and their delivery. They would also be responsible for integration of collection information received from tax administration and maintenance of lifelong database of contributors for future determination of benefits. Legislation should prescribe regimes for assessment, collection, penalties, and appeals with the ultimate objective of seamless administration by a staff trained in all aspects of the new revenue administration role.

It might be useful to emphasize that the new Revenue Administration does not assume the activities performed by health insurance companies and social affairs administration. Thus it can be neither perceived as a takeover of one organization by another, nor as integration resulting in one authority, but as the integration of the collection and audit functions performed by these organizations.

Tax authorities typically see the taxpayer as the employer, especially in countries where individual filing of returns is not common. In such case, there is a risk that the tax authorities may be less interested in enforcing information on individual employees on whose behalf the social contributions are being made. Moreover, health, unemployment, and pension insurance each have different informational needs which should be well understood.

Stringency of data requirements cannot be comprised. Unless integration is carefully designed, social insurance institutions may end up with less information post-integration than prior. This situation can be avoided if the information needs of all the downstream users are integrated in the information that employers are required to supply to tax

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authorities and enforced. The involvement of CSSA and health insurance staff that are familiar with the informational needs of social insurance institutions would be helpful in ensuring that the proposed integration does not lead to the loss of important information. To mitigate this, it would be well advised for the CSSA to plan on operating a parallel system of collection transaction and document processing until such point as it receives full detail of collection information from the unified revenue agency to its satisfaction, at which point full transfer of the collection function could occur.

The development of a new ICT system to comprehend all revenue types (personal tax, corporate tax, VAT, social insurance contributions and health insurance contributions) will be very complicated - possibly overly complicated. There could be institutional resistance - especially at middle management level8- resulting in delay or even obstruction to integration. The new system will require a legislative base. This will likely involve new legislation and amendment to existing social security, health and public administration legislation.

Outside of the institutional issues, the existing political will to pursue an integration strategy, which has bi-partisan support in Parliament, could change. Finally, the Czech Republic assumes the EU Presidency in 2009. This could divert political and institutional focus and resources for a considerable period in the next year.

Therefore, successful integration will need broad support from the entire Government rather than just the MOF, MOLSA and the MOH. It is important that in the legislative and procedural tasks, experts from all the three ministries, and other relevant ministries and government agencies are involved. The Ministers of the involved ministries, and the senior management of the tax administration and the social institutions will need to meet regularly during the preparation and implementation stage. The Management Board for the combined revenue administration, consisting of the three concerned Ministers, is a good mechanism to achieve this coordination and focused involvement. This will provide a permanent consultative process for any issues that may require Government attention.

Internal communication and data exchange are crucial to integration. All staff groups need to respect each other and understand the need for cooperation. It is vital that leaders are selected for both managerial, technical and change management skills, and a perception of neutrality is maintained to balance the interests of the integrating units. The integration should not be perceived as a takeover of one organization by the other, but as a synthesis of a new, more modern agency.

A robust project management team with skilled and committed staff is critical for the success of the transfer of social contribution collection to the new revenue Administration. The project management team should be made responsible for preparing the strategic plan and the project implementation plan and monitoring the implementation of the different actions by the concerned units. An important ingredient for the success of the integration will be effective change management., including informing stakeholders

8 The impact of integration will especially affect middle management.

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of the results and early successes, conducting mass education and media campaign to inform people of the steps and the expectations.

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annexes

Annex 1: Tax and Social Contributions in Czech Republic(% of GDP)

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M a in ta x e s , t a x /G D P r a t io a n d ta x s h a re s , G F S IM F2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9P r e l . F o re c a s t F o re c a s t O u t l o o k

G e n e r a l g o v e r n m e n t re v e n u e 1 ) b i l l.C Z K 9 1 1 .4 9 7 4 .4 1 0 4 9 .4 1 1 8 7 .7 1 2 3 4 .8 1 3 1 4 . 7 1 4 0 5 .4 1 5 0 8 .6 1 5 6 5 . 3p r e v . ye a r= 1 0 0 1 0 9 .3 1 0 6 .9 1 0 7 . 7 1 1 3 .2 1 0 4 1 0 6 .5 1 0 6 .9 1 0 7 . 3 1 0 3 .8

% G D P 3 8 .7 3 9 . 5 4 0 .7 4 2 .2 4 1 . 3 4 0 .7 3 9 .8 3 9 .5 3 8 .1T a x e s a n d s o c i a l c o n t rib u t io n s b i l l.C Z K 8 0 0 .5 8 5 8 .7 9 2 2 . 6 1 0 4 8 .6 1 0 9 8 .6 1 1 6 2 1 2 6 7 .8 1 3 6 3 .2 1 4 1 0

p r e v . ye a r= 1 0 0 1 0 7 .9 1 0 7 .3 1 0 7 . 4 1 1 3 .7 1 0 4 .8 1 0 5 .8 1 0 9 .1 1 0 7 . 5 1 0 3 .4% G D P 3 4 3 4 . 8 3 5 .8 3 7 .3 3 6 . 8 3 6 3 5 .9 3 5 .7 3 4 .3

% to ta l ta x r e v e n u e 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 %

In d i v id u a l in c o m e t a x b i l l.C Z K 1 0 6 .2 1 1 4 .9 1 2 5 . 5 1 3 5 1 3 6 .4 1 3 6 .6 1 5 0 .3 1 4 1 . 6 1 5 1 .8p r e v . ye a r= 1 0 0 1 0 6 .5 1 0 8 .2 1 0 9 . 3 1 0 7 .6 1 0 1 1 0 0 .2 1 1 0 9 4 .2 1 0 7 .2

% G D P 4 .5 4 .7 4 .9 4 . 8 4 .6 4 .2 4 . 3 3 .7 3 .7% to ta l ta x

r e v e n u e 1 3 .3 1 3 . 4 1 3 .6 1 2 .9 1 2 . 4 1 1 .8 1 1 .9 1 0 .4 1 0 .8C o r p o r a t e in c o m e t a x b i l l.C Z K 9 6 .3 1 0 5 .7 1 1 7 . 8 1 3 1 .7 1 3 3 .5 1 4 4 .4 1 5 7 .1 1 6 8 . 3 1 6 2 .3

p r e v . ye a r= 1 0 0 1 2 6 .4 1 0 9 .8 1 1 1 . 4 1 1 1 .9 1 0 1 .3 1 0 8 .2 1 0 8 .8 1 0 7 . 1 9 6 .4% G D P 4 .1 4 .3 4 .6 4 . 7 4 .5 4 .5 4 . 5 4 .4 3 .9

% to ta l ta x r e v e n u e 1 2 .0 1 2 . 3 1 2 .8 1 2 .6 1 2 . 2 1 2 .4 1 2 .4 1 2 .3 1 1 .5

S o c ia l c o n t r ib u t io n s 2 ) b i l l.C Z K 3 3 5 3 6 7 .4 3 8 8 . 9 4 5 2 .8 4 8 2 .1 5 2 4 .8 5 7 2 6 0 9 . 2 6 3 3 .6p r e v . ye a r= 1 0 0 1 0 7 .4 1 0 9 .7 1 0 5 . 8 . 1 0 6 .5 1 0 8 .9 1 0 9 1 0 6 . 5 1 0 4

% G D P 1 4 .2 1 4 . 9 1 5 .1 1 6 .1 1 6 . 1 1 6 .2 1 6 .2 1 5 .9 1 5 .4% to ta l ta x

r e v e n u e 4 1 .8 4 2 . 8 4 2 .2 4 3 .2 4 3 . 9 4 5 .2 4 5 .1 4 4 .7 4 4 .9V a lu e a d d e d t a x b i l l.C Z K 1 4 9 .3 1 5 5 .1 1 6 4 . 3 2 0 2 .1 2 1 0 .6 2 0 8 .8 2 2 9 .6 2 7 1 . 5 2 8 7 .2

p r e v . ye a r= 1 0 0 1 0 5 .6 1 0 3 .9 1 0 5 . 9 1 2 3 1 0 4 .2 9 9 .2 1 0 9 .9 1 1 8 . 2 1 0 5 .8% G D P 6 .3 6 .3 6 .4 7 . 2 7 6 .5 6 . 5 7 .1 7

% to ta l ta x r e v e n u e 1 8 .7 1 8 . 1 1 7 .8 1 9 .3 1 9 . 2 1 8 .0 1 8 .1 1 9 .9 2 0 .4

E x c i s e s b i l l.C Z K 7 6 .8 7 9 . 5 8 7 .5 9 9 .2 1 1 0 .5 1 1 9 .9 1 2 9 .4 1 4 2 . 6 1 4 4 .2p r e v . ye a r= 1 0 0 1 0 7 .6 1 0 3 .6 1 1 0 1 1 3 .4 1 1 1 .4 1 0 8 .5 1 0 7 .9 1 1 0 . 2 1 0 1 .1

% G D P 3 .3 3 .2 3 .4 3 . 5 3 .7 3 .7 3 . 7 3 .7 3 .5% to ta l ta x

r e v e n u e 9 .6 9 .3 9 .5 9 . 5 1 0 . 1 1 0 .3 1 0 .2 1 0 .5 1 0 .2O t h e r t a x e s 3 ) b i l l.C Z K 3 6 .9 3 6 3 8 .6 2 7 .7 2 5 . 5 2 7 .4 2 9 .4 3 0 3 0 .9

p r e v . ye a r= 1 0 0 8 9 .4 9 7 . 4 1 0 7 . 3 7 1 .8 9 1 . 9 1 0 7 .5 1 0 7 .4 1 0 1 . 8 1 0 3 .1% G D P 1 .6 1 .5 1 .5 1 0 .9 0 .8 0 . 8 0 .8 0 .8

% to ta l ta x r e v e n u e 4 .6 4 .2 4 .2 2 . 6 2 .3 2 .4 2 . 3 2 .2 2 .2

1 ) G en eral go vernm e nt re ve nu e a re c on solid ate d. C on so lid at io n invo lves the e l im in atio n o f all m utu a l inte rest, cu rre nt an d c ap it al t ra ns fer f lo w s w i th in o ne su bse cto r an d be tw ee n in d iv id ua l g en eral go vernm e nt sub se ctors.2 ) C o mp ulso r y a nd volu nt ar y p aym e nts of em p lo ye rs ´ ( o n b eh a lf of e mp loye es´ ) ,e mp loye es´ , sel f-e mp loye d an d n o n- em p lo ye d p er so ns to s oc ia l se c ur i ty f un ds an d in s u ra nc e e nt erpr is es .

S in ce 20 04 so cial pa ym e nt s fo r s ta te insu ree s ar e n o la ng er co ns olida te d w ith in go vernm e nt s e c to r an d t his i t em is t he re fo r e a dju s te d f or th is va lue .3 ) T h is i te m c on sis ts o f t axe s fr o m lo tte r y ,im po r t d uty , ta x es fr om fin an cial a n d ca p it al t ra nsa c tio ns, ca pi ta l ta x es a n d o th er ta xes on p ro du ctio n.S ou rc e: M oF , Ma c roec o n o m ic fo re ca st /2 00 7

2 0 0 4 2 0 0 52 0 0 1 2 0 0 2 2 0 0 3

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REFERENCES

A Diagnostic Framework for Revenue Administration, Jit B.S. Gill, World Bank Technical Paper No. 472, World Bank, June 2000. Annual Report 2005: Annual Review and Financial Report, European Bank for Reconstruction and Development. Annual Report of the Czech Tax Administration, 2006, The Central Financial and Tax Directorate, Prague, 2007. Czech Republic, International Development Cooperation of the Czech Republic, Institute of International Relations, 2006. Draft Intended Subject Matter of Act on the Merger of Finance and Customs Administration of the Czech Republic, Ministry of Finance Paper, February 2008. How Does Taxation Affect the Quality of Governance, Mick Moore, IDS Working Paper 280, Institute of Development Studies, 2007. Integrating a Unified Revenue Administration for Tax and Social Contributions:Experiences of Central and Eastern European Countries, Peter Barrand, Stanford Ross and Graham Harrison, IMF Working Paper, December 2004. Paying Taxes, The Global Picture, The World Bank and PricewaterhouseCoopers, 2008. Reforming Tax Systems: The World Bank Record in the 1990s, Luca Barbone, Arindam Das-Gupta, Luc De Wulf and Anna Hansson, Tax Policy and Administration Thematic Group, The World Bank, August 2004. Supporting Institutional Reforms in Tax and Customs: Integrating Tax and Customs Administrations, The World Bank Group, January 2003. Tax Administration and E-government: The Case of the Czech Republic, Jiri Pribil, Jan Pavel, Leos Vitek, Grant Agency of the Czech Republic. Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series, Organization for Economic Cooperation and Development, October 2006. The Future Role of Customs, Directorate General of Taxation and Customs Union, European Commission, Brussels, 2007.

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